Groupon Drops 21%: Price Targets Drop as Estimates Rise

By Tiernan Ray

Shares of Groupon (GRPN) today tumbled $1.39, or 21%, to close at $5.33, after the company yesterday reportedQ1 revenue and a net loss per share that beat analysts’ expectations, forecast this quarter’s results below consensus, and raised its outlook for Ebitda this year.

The stock received several cuts in price target today, though Piper Jaffray‘s Gene Munster was an outlier, raising his price target a buck to $16 as he reiterated an Overweight rating. Munster wrote that North American billings in the local business were disappointing, but that “focusing on that metric misses the bigger story that Groupon’s transaction of building a vibrant marketplace is largely on track.

Elsewhere, there was one downgrade, from Northland Securities‘s Darren Aftahi, who cut his rating from Buy to Hold, and cut his price target in half to $14.

The discussion today is what to do with the fact that the company is split between its original business of sending out coupons via email, and its newer business of running a marketplace, with the two businesses having different economics.

Wunderlich Securities‘s Blake Harper reiterates a Buy rating, but cuts his price target to $10 from $13, writing that its new businesses, while performing well, are not yielding as much profit as the traditional local deals business:

Local billings and revenue growth were up 7% Y/Y and 1% Y/Y, respectively, which has been disappointing due to the headwinds experienced with the transition to the Pull business, which has a lower lead time between purchase and redemption than email does. The company expects N. American Local business to be flat in Q2 before re-accelerating to double-digit growth in the second half of the year due to marketing and Pull transition. We expect Goods billings and revenues to represent an increasing percentage of the overall total, with revenue now over 51% of the business and expected growth from the acquired TMON and ideeli businesses. While the growth has been positive, we view it as an unfavorable mix shift given the lower gross margins, Groupon’s cost disadvantage of 2x other ecommerce competitors, and intense competition in the segment compared to its Local business.

Harper slightly raised his 2014 estimates to $3.199 billion and 14 cents per share profit from a prior $3.196 billion and 12 cents.

Goldman Sachs‘s Heath Terry reiterated a Neutral rating, and cut his target to $8 from $10, writing that “While we continue to believe the opportunity in local is significant and Groupon’s critical mass of users and merchants gives it a meaningful advantage in addressing that opportunity, we believe the degree of difficulty in executing on Groupon’s many initiatives is significant.”

Terry raised his 2014 estimates to $3.177 billion in revenue and a profit of 6 cents a share from $3.1 billion and a 3-cent loss.

Evercore Partners‘s Ken Sena reiterates an Equal Weight rating, and cut his price target to $6.50 from $8, writing that the core business is slowing and the outlook for this year for Ebitda seems questionable:

While Groupon’s billings grew ~8% y/y (x-TMON) compared to 4Q’s 5%, much of this acceleration was driven by Goods. Specifically, if we look at the core Local business in NA and EMEA, we see just 1% growth y/y in both geographies. Meanwhile, gross profit margin came in at just 51% vs. 55% expected and 63% in the prior year, leading to gross profit falling 7% below forecast at $386mm (+2% y/y). Higher FY Guide on Questionable Expectations. Nevertheless, on the expectation for a reacceleration in the Local business and an improvement in Goods margins (where the company sees a pure gross margin ex-shipping of 30% vs. its 5% reported), Groupon increased its FY EBITDA guide to more than $300mm, up from > $285m previously.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.